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Loans and Allowance for Credit Losses

9 Months Ended

Sep. 30, 2022

Loans and Allowance for Credit Losses [Abstract]

Note 5 – Loans and Allowance for Credit Losses

The Company makes residential mortgage, commercial and consumer loans to customers primarily in Anne Arundel County, Baltimore City, Baltimore County, Howard County, Kent County, Queen Anne’s County, Caroline County, Talbot County, Dorchester County and Worcester County in Maryland, Kent and Sussex County, Delaware and in Accomack County, Virginia. The following table provides information about the principal classes of the loan portfolio at September 30, 2022 and December 31, 2021.


(Dollars in thousands)	September 30, 2022		December 31, 2021
Construction	$	230,119	$	239,353
Residential real estate		758,063		654,769
Commercial real estate		1,023,253		896,229
Commercial		160,430		203,377
Consumer		230,018		125,447
Total loans		2,401,883		2,119,175
Allowance for credit losses		(16,277)		(13,944)
Total loans, net	$	2,385,606	$	2,105,231

Loans are stated at their principal amount outstanding net of any purchase premiums/discounts, deferred fees and costs. Included in loans were deferred costs, net of fees, of $967 thousand and $1.2 million at September 30, 2022 and December 31, 2021. At September 30, 2022 and December 31, 2021, included in total loans were $24.7 million and $39.9 million in loans, respectively, net of discounts on acquired loans of $332 thousand and $516 thousand, respectively, as part of the Northwest Bancshares, Inc. branch acquisition in 2017. At September 30, 2022 and December 31, 2021, included in total loans were $407.8 million and $553.0 million in loans, acquired as part of the acquisition of Severn. These balances were presented net of the related discount which totaled $7.3 million and $8.4 million at September 30, 2022 and December 31, 2021, respectively. Interest income on loans is accrued at the contractual rate based on the principal amount outstanding. Fees charged and costs capitalized for originating loans are being amortized substantially on the interest method over the term of the loan. A loan is placed on nonaccrual (i.e., interest income is no longer accrued) when it is specifically determined to be impaired or when principal or interest is delinquent for 90 days or more, unless the loan is well secured and in the process of collection. Any unpaid interest previously accrued on those loans is reversed from income.

Interest payments received on nonaccrual loans are applied as a reduction of the loan principal balance unless collectability of the principal amount is reasonably assured, in which case interest is recognized on a cash basis. Loans are returned to accrual status when all principal and interest amounts contractually due are brought current and future payments are reasonably assured.

A loan is considered impaired if it is probable that the Company will not collect all principal and interest payments according to the loan’s contractual terms when due. An impaired loan may show deficiencies in the borrower’s overall financial condition, payment history, support available from financial guarantors and/or the fair market value of collateral. The impairment of a loan is measured at the present value of expected future cash flows using the loan’s effective interest rate, or at the loan’s observable market price or the fair value of the collateral if the loan is collateral dependent. Generally, the Company measures impairment on such loans by reference to the fair value of the collateral. Once the amount of impairment has been determined, the uncollectible portion is charged off. Loan payments received on nonaccrual impaired loans are generally applied to the outstanding principal balance. In certain circumstances, income may be recognized on a cash basis. Generally, interest income is not recognized on impaired loans unless the likelihood of further loss is remote. The allowance for credit losses may include specific reserves related to impaired loans. Specific reserves remain until charge offs are made. Impaired loans do not include groups of smaller balance homogenous loans such as residential mortgage and consumer installment loans that are evaluated collectively for impairment. Reserves for probable credit losses related to these loans are based on historical loss ratios and are included in the formula portion of the allowance for credit losses.

A loan is considered a TDR if a borrower is experiencing financial difficulties and a creditor has granted a concession. Concessions may include interest rate reductions or below market interest rates, principal forgiveness, restructuring amortization schedules and other actions intended to minimize potential losses. Loans are identified to be restructured when signs of impairment arise such as borrower interest rate reduction request, slowness to pay, or when an inability to

repay becomes evident. The terms being offered are evaluated to determine if they are more liberal than those that would be indicated by policy or industry standards for similar, untroubled credits. In those situations where the terms or the interest rates are considered to be more favorable than industry standards or the Bank’s current underwriting guidelines the loan is classified as a TDR. All loans designated as TDRs are considered impaired loans and may be on either accrual or nonaccrual status. In instances where the loan has been placed on nonaccrual status, six consecutive months of timely payments are required prior to returning the loan to accrual status.

All loans classified as TDRs which are restructured and accrue interest under revised terms require a full and comprehensive review of the borrower’s financial condition, capacity for repayment, realistic assessment of collateral values, and the assessment of risk entered into any workout agreement. Current financial information on the borrower, guarantor, and underlying collateral is analyzed to determine if it supports the ultimate collection of principal and interest. For commercial loans, the cash flows are analyzed, both for the underlying project and globally. For consumer loans, updated salary, credit history and cash flow information is obtained. Current market conditions are also considered. Following a full analysis, the determination of the appropriate loan structure is made.

During 2021 and 2020, the Company participated in the Small Business Administration’s Paycheck Protection Program (PPP). As of September 30, 2022, the Company held PPP loans with a total outstanding balance of $291 thousand, inclusive of loans issued pre-merger and those acquired from Severn, which are included in the commercial loan segment in the table above. As of December 31, 2021, the Company held PPP loans with a total outstanding balance of $27.6 million, of which $9.2 million was acquired from Severn, which are included in the commercial loan segment in the table above. The decrease is due to repayment and forgiveness received as of September 30, 2022. As compensation for originating the loans, the Company received lender processing fees from the SBA, which were deferred, along with the related loan origination costs. These net fees are being accreted to interest income over the remaining contractual lives of the loans. Upon forgiveness of a PPP loan and repayment by the SBA, which may be prior to the loan’s maturity, the remainder of any unrecognized net fees are recognized as interest income.

The following tables provide information about all loans acquired from Severn.


	September 30, 2022
	Acquired Loans -		Acquired Loans -
	Purchased		Purchased		Acquired Loans -
(Dollars in thousands)	Credit Impaired		Performing		Total
Outstanding principal balance	$	31,334	$	383,767	$	415,101
Carrying amount
Construction	$	665	$	27,883	$	28,548
Residential real estate		15,061		132,311		147,372
Commercial real estate		12,339		180,493		192,832
Commercial		197		38,140		38,337
Consumer		19		733		752
Total loans	$	28,281	$	379,560	$	407,841


	December 31, 2021
	Acquired Loans -		Acquired Loans -
	Purchased		Purchased		Acquired Loans -
(Dollars in thousands)	Credit Impaired		Performing		Total
Outstanding principal balance	$	36,943	$	524,474	$	561,417
Carrying amount
Construction	$	2,379	$	91,823	$	94,202
Residential real estate		17,326		167,580		184,906
Commercial real estate		13,594		202,819		216,413
Commercial		321		56,200		56,521
Consumer		30		921		951
Total loans	$	33,650	$	519,343	$	552,993

The following table presents a summary of the change in the accretable yield on PCI loans acquired from Severn.


	For the Nine Months Ended
(Dollars in thousands)	September 30, 2022
Accretable yield, beginning of period	$	5,367
Accretion		(1,195)
Reclassification of nonaccretable difference due to improvement in expected cash flows		399
Other changes, net		287
Accretable yield, end of period	$	4,858

At September 30, 2022, the Bank was servicing $346.9 million in loans for the Federal National Mortgage Association and $74.5 million in loans for the Federal Home Loan Mortgage Corporation.

In the normal course of banking business, risks related to specific loan categories are as follows:

Construction loans – Construction loans are offered primarily to builders and individuals to finance the construction of single-family dwellings. In addition, the Bank periodically finances the construction of commercial projects. Credit risk factors include the borrower’s ability to successfully complete the construction on time and within budget, changing market conditions which could affect the value and marketability of projects, changes in the borrower’s ability or willingness to repay the loan and potentially rising interest rates which can impact both the borrower’s ability to repay and the collateral value.

Residential real estate – Residential real estate loans are typically made to consumers and are secured by residential real estate. Credit risk arises from the borrower’s continuing financial stability, which can be adversely impacted by job loss, divorce, illness, or personal bankruptcy, among other factors. Also impacting credit risk would be a shortfall in the value of the residential real estate in relation to the outstanding loan balance in the event of a default or subsequent liquidation of the real estate collateral.

Commercial real estate – Commercial real estate loans consist of both loans secured by owner occupied properties and non-owner occupied properties where an established banking relationship exists and involves investment properties for warehouse, retail, and office space with a history of occupancy and cash flow. These loans are subject to adverse changes in the local economy and commercial real estate markets. Credit risk associated with owner occupied properties arises from the borrower’s financial stability and the ability of the borrower and the business to repay the loan. Non-owner occupied properties carry the risk of a tenant’s deteriorating credit strength, lease expirations in soft markets and sustained vacancies which can adversely impact cash flow.

Commercial – Commercial loans are secured or unsecured loans for business purposes. Loans are typically secured by accounts receivable, inventory, equipment and/or other assets of the business. Credit risk arises from the successful operation of the business which may be affected by competition, rising interest rates, regulatory changes and adverse conditions in the local and regional economy.

Consumer – Consumer loans include home equity loans and lines, installment loans and personal lines of credit. Credit risk is similar to residential real estate loans above as it is subject to the borrower’s continuing financial stability and the value of the collateral securing the loan.

The following tables include impairment information relating to loans and the allowance for credit losses as of September 30, 2022 and December 31, 2021.

Residential

Commercial

(Dollars in thousands)

Construction

real estate

Commercial

Consumer

Total

September 30, 2022

Loans individually evaluated for impairment

415

4,146

2,271

193

7,053

Loans collectively evaluated for impairment

229,039

738,856

1,008,643

160,040

229,971

2,366,549

Acquired loans - PCI

665

15,061

12,339

197

28,281

Total loans

230,119

758,063

1,023,253

160,430

230,018

2,401,883

Allowance for credit losses allocated to:

Loans individually evaluated for impairment

—

150

—

150

Loans collectively evaluated for impairment

3,032

2,858

5,009

1,907

3,321

16,127

Acquired loans - PCI

—

Total allowance

3,032

3,008

5,009

1,907

3,321

16,277


			Residential		Commercial
(Dollars in thousands)	Construction		real estate		real estate		Commercial		Consumer		Total
December 31, 2021
Loans individually evaluated for impairment	$	321	$	3,717	$	3,833	$	226	$	—	$	8,097
Loans collectively evaluated for impairment		236,653		633,726		878,802		202,830		125,417		2,077,428
Acquired loans - PCI		2,379		17,326		13,594		321		30		33,650
Total loans	$	239,353	$	654,769	$	896,229	$	203,377	$	125,447	$	2,119,175

Allowance for credit losses allocated to:
Loans individually evaluated for impairment	$	—	$	172	$	1	$	—	$	—	$	173
Loans collectively evaluated for impairment		2,454		2,686		4,597		2,070		1,964		13,771
Acquired loans - PCI		—		—		—		—		—		—
Total allowance	$	2,454	$	2,858	$	4,598	$	2,070	$	1,964	$	13,944

The allowance for loan losses was 0.68% of total loans and 0.84% when excluding PPP loans and acquired loans, at September 30, 2022 compared to 0.66% and 0.93% at December 31, 2021.

The following tables provide information on impaired loans and any related allowance by loan class as of September 30, 2022 and December 31, 2021. The difference between the unpaid principal balance and the recorded investment is the amount of partial charge-offs that have been taken and interest paid on nonaccrual loans that has been applied to principal.


			Recorded		Recorded
	Unpaid		investment		investment				Quarter-to-date		Year-to-date		Interest
	principal		with no		with an		Related		average recorded		average recorded		income
(Dollars in thousands)	balance		allowance		allowance		allowance		investment		investment		recognized
September 30, 2022
Impaired nonaccrual loans:
Construction	$	297	$	297	$	—	$	—	$	297	$	314	$	—
Residential real estate		1,374		1,268		15		—		1,639		1,534		—
Commercial real estate		159		150		—		—		466		704		—
Commercial		374		193		—		—		197		242		—
Consumer		29		28		—		—		40		48		—
Total	$	2,233	$	1,936	$	15	$	—	$	2,639	$	2,842	$	—

Impaired accruing TDRs:
Construction	$	14	$	14	$	—	$	—	$	14	$	18	$	1
Residential real estate		2,874		557		2,184		150		2,750		3,064		83
Commercial real estate		1,703		1,703		—		—		1,830		2,231		48
Commercial		—		—		—		—		—		—		—
Consumer		—		—		—		—		—		6		—
Total	$	4,591	$	2,274	$	2,184	$	150	$	4,594	$	5,319	$	132

Other impaired accruing loans:
Construction	$	104	$	104	$	—	$	—	$	304	$	190	$	6
Residential real estate		122		122		—		—		745		259		3
Commercial real estate		418		418		—		—		537		493		7
Commercial		—		—		—		—		13		7		1
Consumer		—		—		—		—		—		13		—
Total	$	644	$	644	$	—	$	—	$	1,599	$	962	$	17

Total impaired loans:
Construction	$	415	$	415	$	—	$	—	$	615	$	522	$	7
Residential real estate		4,370		1,947		2,199		150		5,134		4,857		86
Commercial real estate		2,280		2,271		—		—		2,833		3,428		55
Commercial		374		193		—		—		210		249		1
Consumer		29		28		—		—		40		67		—
Total	$	7,468	$	4,854	$	2,199	$	150	$	8,832	$	9,123	$	149


			Recorded		Recorded				September 30, 2021
	Unpaid		investment		investment				Quarter-to-date		Year-to-date		Interest
	principal		with no		with an		Related		average recorded		average recorded		income
(Dollars in thousands)	balance		allowance		allowance		allowance		investment		investment		recognized
December 31, 2021
Impaired nonaccrual loans:
Construction	$	297	$	297	$	—	$	—	$	297	$	297	$	—
Residential real estate		882		803		—		—		959		1,191		—
Commercial real estate		994		606		—		—		2,150		2,459		—
Commercial		380		216		—		—		230		241		—
Consumer		—		—		—		—		—		12		—
Total	$	2,553	$	1,922	$	—	$	—	$	3,636	$	4,200	$	—

Impaired accruing TDRs:
Construction	$	24	$	24	$	—	$	—	$	28	$	31	$	2
Residential real estate		2,965		475		2,361		172		2,871		3,252		118
Commercial real estate		2,807		2,352		455		1		2,913		2,994		67
Commercial		—		—		—		—		—		—		—
Consumer		—		—		—		—		—		—		—
Total	$	5,796	$	2,851	$	2,816	$	173	$	5,812	$	6,277	$	187

Other impaired accruing loans:
Construction	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Residential real estate		78		78		—		—		328		513		7
Commercial real estate		420		420		—		—		421		470		10
Commercial		10		10		—		—		—		17		—
Consumer		—		—		—		—		—		—		—
Total	$	508	$	508	$	—	$	—	$	749	$	1,000	$	17

Total impaired loans:
Construction	$	321	$	321	$	—	$	—	$	325	$	328	$	2
Residential real estate		3,925		1,356		2,361		172		4,158		4,956		125
Commercial real estate		4,221		3,378		455		1		5,484		5,923		77
Commercial		390		226		—		—		230		258		—
Consumer		—		—		—		—		—		12		—
Total	$	8,857	$	5,281	$	2,816	$	173	$	10,197	$	11,477	$	204

The following tables provide a roll-forward for TDRs as of September 30, 2022 and September 30, 2021.


	1/1/2022												9/30/2022
	TDR		New		Disbursements		Charge-		Reclassifications/				TDR		Related
(Dollars in thousands)	Balance		TDRs		(Payments)		offs		Transfer In/(Out)		Payoffs		Balance		Allowance
For the Nine Months Ended
September 30, 2022
Accruing TDRs
Construction	$	24	$	—	$	(10)	$	—	$	—	$	—	$	14	$	—
Residential real estate		2,836		—		(75)		—		(20)		—		2,741		150
Commercial real estate		2,807		—		(157)		—		—		(947)		1,703		—
Commercial		—		—		—		—		—		—		—		—
Consumer		—		—		—		—		—		—		—		—
Total	$	5,667	$	—	$	(242)	$	—	$	(20)	$	(947)	$	4,458	$	150

Nonaccrual TDRs
Construction	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Residential real estate		—		—		(4)		—		20		—		16		—
Commercial real estate		—		—		—		—		—		—		—		—
Commercial		216		—		(32)		—		—		—		184		—
Consumer		—		—		—		—		—		—		—		—
Total	$	216	$	—	$	(36)	$	—	$	20	$	—	$	200	$	—

Total	$	5,883	$	—	$	(278)	$	—	$	—	$	(947)	$	4,658	$	150


	1/1/2021												9/30/2021
	TDR		New		Disbursements		Charge-		Reclassifications/				TDR		Related
(Dollars in thousands)	Balance		TDRs		(Payments)		offs		Transfer In/(Out)		Payoffs		Balance		Allowance
For the Nine Months Ended
September 30, 2021
Accruing TDRs
Construction	$	34	$	—	$	(7)	$	—	$	—	$	—	$	27	$	—
Residential real estate		3,845		—		(82)		—		—		(900)		2,863		84
Commercial real estate		3,118		—		(258)		—		—		—		2,860		—
Commercial		—		—		—		—		—		—		—		—
Consumer		—		—		—		—		—		—		—		—
Total	$	6,997	$	—	$	(347)	$	—	$	—	$	(900)	$	5,750	$	84

Nonaccrual TDRs
Construction	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Residential real estate		—		—		—		—		—		—		—		—
Commercial real estate		—		—		—		—		—		—		—		—
Commercial		258		—		(31)		—		—		—		227		—
Consumer		—		—		—		—		—		—		—		—
Total	$	258	$	—	$	(31)	$	—	$	—	$	—	$	227	$	—

Total	$	7,255	$	—	$	(378)	$	—	$	—	$	(900)	$	5,977	$	84

There were no loans modified and considered to be TDRs during the three and nine months ended September 30, 2022 and September 30, 2021.

There were no TDRs which subsequently defaulted within 12 months of modification for the three and nine months ended September 30, 2022 and 2021. Generally, a loan is considered in default when principal or interest is past due 90 days or more, the loan is placed on nonaccrual, the loan is charged off, or there is a transfer to other real estate owned (OREO) or repossessed assets.

Management uses risk ratings as part of its monitoring of the credit quality in the Company’s loan portfolio. Loans that are identified as special mention, substandard or doubtful are adversely rated. These loans and the pass/watch loans are assigned higher qualitative factors than favorably rated loans in the calculation of the formula portion of the allowance for credit losses. At September 30, 2022, there were no nonaccrual loans classified as special mention or doubtful and $2.0 million of nonaccrual loans were classified as substandard. Similarly, at December 31, 2021, there were no nonaccrual loans classified as special mention or doubtful and $2.0 million of nonaccrual loans were classified as substandard.

The following tables provide information on loan risk ratings as of September 30, 2022 and December 31, 2021.

Special

(Dollars in thousands)

Pass/Performing

Pass/Watch

Mention

Substandard

Doubtful

PCI

Total

September 30, 2022

Construction

217,823

9,553

1,781

297

—

665

230,119

Residential real estate

708,215

32,488

969

1,330

—

15,061

758,063

Commercial real estate

882,561

125,246

2,538

569

—

12,339

1,023,253

Commercial

141,864

17,677

499

193

—

197

160,430

Consumer

229,776

193

—

230,018

Total

2,180,239

185,157

5,789

2,417

—

28,281

2,401,883


					Special
(Dollars in thousands)	Pass/Performing		Pass/Watch		Mention		Substandard		Doubtful		PCI		Total
December 31, 2021
Construction	$	210,287	$	24,513	$	1,877	$	297	$	—	$	2,379	$	239,353
Residential real estate		596,694		38,309		1,539		901		—		17,326		654,769
Commercial real estate		724,561		151,209		4,535		2,330		—		13,594		896,229
Commercial		186,176		16,654		—		226		—		321		203,377
Consumer		125,200		215		—		2		—		30		125,447
Total	$	1,842,918	$	230,900	$	7,951	$	3,756	$	—	$	33,650	$	2,119,175

The following tables provide information on the aging of the loan portfolio as of September 30, 2022 and December 31, 2021.

Accruing

30‑59 days

60‑89 days

Greater than

Total

(Dollars in thousands)

Current

past due

90 days

past due

Nonaccrual

PCI

Total

September 30, 2022

Construction

229,053

—

104

297

665

230,119

Residential real estate

738,911

2,032

657

121

2,810

1,281

15,061

758,063

Commercial real estate

1,009,749

596

—

419

1,015

150

12,339

1,023,253

Commercial

159,674

286

—

366

193

197

160,430

Consumer

229,218

742

—

753

230,018

Total

2,366,605

3,450

954

644

5,048

1,949

28,281

2,401,883

Percent of total loans

98.6

0.1

—

0.1

1.2

100.0


	Accruing
				30‑59 days			60‑89 days			Greater than			Total
(Dollars in thousands)	Current			past due			past due			90 days			past due			Nonaccrual			PCI			Total
December 31, 2021
Construction	$	235,757		$	920		$	—		$	—		$	920		$	297		$	2,379		$	239,353
Residential real estate		635,166			1,371			25			78			1,474			803			17,326			654,769
Commercial real estate		881,350			259			—			420			679			606			13,594			896,229
Commercial		202,503			183			62			10			255			298			321			203,377
Consumer		125,130			287			—			—			287			—			30			125,447
Total	$	2,079,906		$	3,020		$	87		$	508		$	3,615		$	2,004		$	33,650		$	2,119,175
Percent of total loans		98.2	%		0.1	%		—	%		—	%		0.1	%		0.1	%		1.6	%		100.0	%

The following tables provide a summary of the activity in the allowance for credit losses allocated by loan class for the three and nine months ended September 30, 2022 and September 30, 2021. Allocation of a portion of the allowance to one loan class does not preclude its availability to absorb losses in other loan classes.

Residential

Commercial

(Dollars in thousands)

Construction

real estate

Commercial

Consumer

Total

For three months ended

September 30, 2022

Allowance for credit losses:

Beginning Balance

3,345

2,778

4,441

1,681

3,238

15,483

Charge-offs

—

(202)

—

(202)

Recoveries

243

321

Net (charge-offs) recoveries

243

(142)

119

Provision

(315)

218

325

368

675

Ending Balance

3,032

3,008

5,009

1,907

3,321

16,277


			Residential		Commercial
(Dollars in thousands)	Construction		real estate		real estate		Commercial		Consumer		Total
For three months ended
September 30, 2021
Allowance for credit losses:
Beginning Balance	$	2,574	$	3,812	$	5,600	$	1,879	$	1,223	$	15,088

Charge-offs		—		—		—		(55)		(1)		(56)
Recoveries		161		9		—		26		7		203
Net (charge-offs) recoveries		161		9		—		(29)		6		147

Provision		(114)		77		(73)		2		398		290
Ending Balance	$	2,621	$	3,898	$	5,527	$	1,852	$	1,627	$	15,525

Residential

Commercial

(Dollars in thousands)

Construction

real estate

Commercial

Consumer

Total

For nine months ended

September 30, 2022

Allowance for credit losses:

Beginning Balance

2,454

2,858

4,598

2,070

1,964

13,944

Charge-offs

—

(4)

(6)

(416)

(31)

(457)

Recoveries

131

948

200

1,315

Net (charge-offs) recoveries

127

942

(216)

(4)

858

Provision

569

(531)

1,361

1,475

Ending Balance

3,032

3,008

5,009

1,907

3,321

16,277


			Residential		Commercial
(Dollars in thousands)	Construction		real estate		real estate		Commercial		Consumer		Total
For nine months ended
September 30, 2021
Allowance for credit losses:
Beginning Balance	$	2,022	$	3,699	$	5,426	$	2,089	$	652	$	13,888

Charge-offs		—		—		—		(162)		(5)		(167)
Recoveries		171		72		64		122		10		439
Net (charge-offs) recoveries		171		72		64		(40)		5		272

Provision		428		127		37		(197)		970		1,365
Ending Balance	$	2,621	$	3,898	$	5,527	$	1,852	$	1,627	$	15,525

Foreclosure Proceedings

There were $81 thousand of consumer mortgage loans collateralized by residential real estate property that were in the process of foreclosure as of September 30, 2022 and $311 thousand as of December 31, 2021, respectively. There was 1 residential real estate property included in the balance of other real estate owned totaling $18 thousand at September 30, 2022 and 1 residential real estate property totaling $203 thousand at December 31, 2021.

All accruing TDRs were in compliance with their modified terms. Both performing and non-performing TDRs had no further commitments associated with them as of September 30, 2022 and December 31, 2021.